After the Godzilla Effect: Financial Express: 26th August 2008

Banking was a rather somnolent business until 1992 when bankers simply waited for the customers to walk up to them, because the latter didn’t really have many choices. Then the force of competition ushered in by the implementation of the Narasimham Committee Report changed this landscape substantially. The entry of new private banks and the spread of foreign banks added momentum to these changes. But the strategies that initially took innovative routes have ironically returned to a pre-reforms mode typified by conservatism. Consider the following u-turns:
New private banks have usually been innovative trendsetters. They were the first ones to introduce technologies like ATMs and phone banking and Internet banking, which were swiftly accepted by their customers. Till a short time ago, there was immense competition among these banks to grab ATM leadership. First, ICICI Bank claimed this spot, but SBI soon let it be known that it was the one with the highest number of ATMs in the country. But now the RBI is encouraging banks to share their ATMs to save on equipment costs, and the numbers game has become non-existent.
Secondly, in the initial post-reforms phase, banks were keen to attract customers by giving out bundled products such as cards, loans etc. The idea was to reach out to as many customers as possible and garner market share. The move was towards mass banking. Today, however, banks want only high-end customers and have changed tracks.
On the lending side, banks initially went in for big-ticket customers as the Godzilla effect took shape. Corporates were segregated into large and small categories, with the focus being on the larger ones that were expected to help maintain better quality portfolios. While the private banks took the lead here, the public sector banks also followed the same route to keep in the race. Today banks have switched over to the SME route on the grounds that this is category with the larger potential, and also has a healthy track record.
There was also a time when banks were rushing into the retail segment. The idea was that housing loans were safe bets with low default rates. Besides, as houses were hypothecated to banks, there was reason to believe that these loans could not go bad. Banks hence lent extensively to this sector and set up special divisions for the same. Low interest rates and longer tenures were the attractionsHowever, with interest rates climbing of late and the shadows of the sub-prime crisis hanging over us, banks are fast withdrawing from this segment. They are increasing rates to better protect their bottom lines, and trying to ensure better repayments by focussing on high-end customers.
Earlier, banks were offering variable lending schemes where borrowers had the choice of fixed and flexible interest rates. This was at a time when the flexible schemes made sense because rates were poised southwards. With interest rates going up lately, these options are hardly exercised anymore, and we are seeing only fixed rates in both the deposits and loans segments.
Also, in the post-reform period, the basic mantra for expansion has been one of taking over smaller banks in order to reap economies of scale: one got branches, customers, business and skilled staff through such mergers. Today the sector is wary of mergers, especially since there is now the possibility of foreign banks actually taking over Indian banks after 2009, when this sector is opened up.
These u-turns mean that the current landscape is characterised by well-diversified conventional portfolios and stable rates rather than variable rates. On the deposits side, customers are returning to the branches even though other modes have been remarkably well accepted. While mass banking is still the preferred choice today, class banking is increasingly being prioritised. In short, the overall approach to strategy appears to have come full circle, or almost.